When facing high-interest debt, you have two primary consolidation options: personal loans or balance transfer credit cards. Both can save you money, but the mathematically optimal choice depends on your specific situation. As a CPA who has run thousands of these calculations, I'll show you exactly how to determine which option saves you the most.
Understanding Your Options
Before comparing numbers, let's clarify what each option entails:
Personal Loans: Installment loans with fixed interest rates, fixed monthly payments, and set repayment terms (typically 2-7 years). Rates range from 6% to 36%, depending on creditworthiness.
Balance Transfer Cards: Credit cards offering 0% APR promotional periods (typically 12-21 months), followed by standard variable rates (often 18-29%). Most charge a 3-5% balance transfer fee.
The Mathematical Comparison
Let's compare a $10,000 debt consolidation using real-world numbers:
Scenario A: Personal Loan at 10% APR (5-year term)
- Monthly payment: $212.47
- Total interest paid: $2,748.20
- Total cost: $12,748.20
Scenario B: Balance Transfer at 0% for 18 months (3% fee, then 22% APR)
- Transfer fee: $300
- To pay off in 18 months: $572.22/month
- If not paid off, remaining balance at 22% APR
If you can pay off the balance transfer within the promotional period, your total cost is just the $300 fee—saving $2,448 compared to the personal loan. However, if you still owe $5,000 when the 0% period ends and take 3 more years to pay at 22% APR, you'll pay an additional $1,859 in interest, making the personal loan the better choice.
The Decision Framework
Choose a balance transfer card if:
- You can pay off the balance during the 0% promotional period
- You have excellent credit (qualifying for the longest 0% terms)
- You have the discipline to avoid new purchases on the card
- The balance transfer fee is less than 3 months of current interest
Choose a personal loan if:
- You need longer than 18-21 months to pay off the debt
- You qualify for a rate under 12% APR
- You prefer predictable monthly payments
- You want to close credit card accounts (removing temptation)
The Hybrid Strategy
For large debts, consider a hybrid approach: Use a balance transfer card for the portion you can pay off during the 0% period, and a personal loan for the remainder. This maximizes interest savings while maintaining manageable payments.
Example: $20,000 total debt. Transfer $10,000 to a 0% card (pay $556/month for 18 months), take a $10,000 personal loan at 10% ($212/month for 5 years). Total monthly payment: $768 for 18 months, then $212 for 42 months.